Gas prices stubbornly high despite oil boom

Energy • Speculators, China's economy and other factors stand in way of relief.

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This is an archived article that was published on sltrib.com in 2013, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

The U.S. is increasing its oil production faster than ever, and American drivers are guzzling less gas. But you'd never know it from the price at the pump.

Although prices are down from a month ago, the national average for a gallon of gasoline is well above $3.50, at $3.69, and forecast to creep higher, possibly approaching $4 by May.

"I just don't get it," said Steve Laffoon, a part-time mental health worker, who recently paid $3.59 per gallon to fill up in St. Louis.

Drivers in Connecticut, New York and Washington, D.C., are paying $3.92 or more per gallon on average, according to the Oil Price Information Service. Drivers in Rocky Mountain states, where refineries can tap low-priced crude from the U.S. and Canada, are paying far less. Gas costs $3.42 or less in Wyoming, Utah and Montana.

U.S. oil output rose 14 percent to 6.5 million barrels per day last year  a record increase. By 2020, the nation is forecast to overtake Saudi Arabia as the world's largest crude oil producer. At the same time, U.S. gasoline demand has fallen to 8.7 million barrels a day, its lowest level since 2001, as people switch to more fuel-efficient cars.

So is the high price of gasoline a signal that markets aren't working properly?

Not at all, experts say. The laws of supply and demand are working, just not in the way U.S. drivers would prefer. And it's not all supply or demand.

U.S. drivers are competing with drivers worldwide for every gallon of gasoline. As the developing economies of Asia and Latin America expand, their energy consumption is rising, which puts pressure on fuel supplies and prices everywhere else.

The U.S. still consumes more oil than any other country, but demand is weak and imports are falling. That leaves China, which overtook the U.S. late last year as the world's largest oil importer, as the single-biggest influence on global demand for fuels. China's consumption has risen 28 percent in five years, to 10.2 million barrels per day last year.

"There's an 800-pound gorilla in the picture now  the Chinese economy," said Patrick DeHaan, chief petroleum analyst at the price-tracking service GasBuddy.com.

U.S. refiners are free to sell gasoline and diesel to the highest bidder around the world. In 2011, the U.S. became a net exporter of fuels for the first time in 60 years. Mexico and Canada are the two biggest destinations for U.S. fuels, followed by Brazil and the Netherlands.

Two other factors are making gasoline expensive:

Brent crude, a benchmark used to set the price of oil for many U.S. refiners, is $108 per barrel. It hasn't been below $100 per barrel since July. On average, the price of crude is responsible for two-thirds of the price of gasoline, according to the Energy Department. Also, refineries temporarily close in the winter, when driving declines, to perform annual maintenance. That lowers gasoline inventories and sends prices higher nearly every year in the late winter and spring.

But even these factors argue for at least less volatility in the price of oil and thus gasoline.

Enter financial speculation. Commercial end-users of oil such as airlines and trucking companies who once dominated 70 percent of the market for future deliveries of oil now represent just 30 percent. Non-commercial financial speculators now dominate 70 percent of the market. The trading is dominated by Wall Street banks, hedge funds and other financial institutions that have no intention to take delivery of the oil needed to make gasoline.

"It's speculators who are moving markets," said Bart Chilton, a commissioner at the Commodity Futures Trading Commission. "They are almost exclusively the entire market at certain periods of time."

Rising gasoline prices act as a drag on the economy because they leave less money in drivers' wallets to spend on other things. Because average prices have remained in a consistent range  between $3 and $4 per gallon since the end of 2010  economists say their effect on growth has been minimal.

For the year, prices are forecast to average $3.55 per gallon, slightly lower than last year's record average of $3.63. The peak for 2013, likely to come this spring, is expected to fall slightly short of last year's peak of $3.94.

The good news is that the national average price is 15 cents lower than last year at this time, because of slightly lower oil prices and less concern over the situation in the Middle East. But disruptions at refineries or pipelines, or threats to oil supplies around the world, could send gasoline prices sharply higher at any moment, analysts say. 

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